Henry Ford, Beaumont $6.6-billion mega merger is called off

11:51 PM, May 21, 2013

With great enthusiasm, board members and executives of both Henry Ford and Beaumont health systems announced the merger in late October, saying the union would save the institutions $200 million over 18 months. / Free Press file photos

Detroit Free Press Business Writer

Henry Ford CEO Nancy Schlichting’s letter

After much deliberation, the Henry Ford Health System Board of Trustees has voted to allow the Letter of Intent with Beaumont Health System to expire at the end of this week and to not continue further discussions.This decision was made because it became apparent that two very different perspectives had emerged for the new organization between Henry Ford and Beaumont. As a result, many of the foundational elements in the Letter of Intent, including preserving two academic medical centers in Detroit and Royal Oak, were no longer supported by some leaders at Beaumont.This Due Diligence period is exactly for this type of discovery, and we are taking the lessons learned and moving forward in a strong, positive direction. For the 10th consecutive year, the $4.5 billion Henry Ford Health System experienced positive revenue growth and net income in 2012, and we expect to do the same in 2013.I am so grateful for all of the contributions of our team members during this process, and have learned a great deal that will help us as we pursue our vision. Throughout the entire merger process, people repeatedly commented on the professionalism, expertise and engagement of our staff, and I am so appreciative of all of your efforts.Our commitment to serving the needs of the people of Detroit, Southeast Michigan and beyond is unwavering. We will continue to be part of the economic revitalization of the region and are excited about continuing to lead this state and this country in meeting and exceeding the needs and expectations of our customers.

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After six months of planning and one delay, Henry Ford and Beaumont health systems called off their planned $6.6-billion mega merger today that would have created one of the largest hospital systems in Michigan.

In a letter to employees, Henry Ford CEO Nancy Schlichting said her hospital system’s 20-member Board of Trustees voted late this afternoon to allow the deal’s letter of intent to expire at the end of this week.

“This decision was made because it became apparent that two very different perspectives had emerged for the new organization between Henry Ford and Beaumont,” Schlichting’s letter says.

Schlichting’s message did not offer detailed reasons, but she did place some blame on Beaumont.

“Many of the foundational elements in the letter of intent, including preserving two academic medical centers in Detroit and Royal Oak, were no longer supported by some leaders at Beaumont,” she wrote.

Beaumont CEO Gene Michalski said in a written statement tonight that his hospital system benefited from the merger talks. “However, we found through our discussions that we are not aligned on how to achieve our vision for a model health system due to differences in our structures and business models,” Michalski said.

A Beaumont spokeswoman, Colette Stimmell, said the system “will continue our review of other potential partners.”

A Henry Ford spokesman had no comment beyond Schlichting’s letter.

Nearly two years ago, Beaumont started looking for a merger partner to strengthen itself ahead of full implementation of the Affordable Care Act on Jan. 1, which is expected to cut some reimbursements and add new uncertainties in the market. Henry Ford accepted, and officials said the merger announced in late October would be good for patients and the hospital systems’ balance sheets.

It remained unclear tonight why the discussions broke down, though a group of Beaumont physicians told the Beaumont board in a letter last week that they opposed the merger. Board members and hospital executives close to the deal declined multiple Free Press requests for comment over during the past week about the merger discussions, including tonight.

But at least one analyst interviewed was not surprised by the outcome, saying the two large systems are known for their different cultures and that coming to an agreement was always going to be difficult.

The now-scuttled plans would have joined eight metro Detroit hospitals and nearly 200 patient care sites. The combined nonprofit system would have represented about 35% of the market share in the three-county area of Wayne, Oakland and Macomb. On their own, Henry Ford and Beaumont currently represent the region’s No. 1 and No. 2 systems by net patient revenue.

“They are very different medical cultures between the two organizations. They are very different structurally,” said Marianne Udow-Phillips, director of the Ann Arbor-based Center for Healthcare Research and Transformation. “Once the physicians at Beaumont said, quite publicly, that they had a lot of concerns about it, that made it clear that it was going to be even harder to make this happen.”

Allan Baumgarten, an independent hospital market analyst, said it is somewhat exceptional for such a deal to be called off so late in the merging process. Still, Baumgarten said, it appears the two systems will have the financial wherewithal to continue independently.

Beaumont reported $109 million in net income last year off $2.2 billion in revenue, one of its best years in recent memory.

Henry Ford reported $53 million in net income off $4.4 billion in revenue, a $9.8-million decrease from 2011.

“No question that I think these two systems are formidable and can go forward,” said Baumgarten, who produces the annual Michigan Health Market Review. “But they had identified some strengths where the whole would be larger than the sum of the parts, and now they won’t be able to achieve those.”

With great enthusiasm, board members and executives of both hospital systems announced the merger in late October. The union was once estimated to save the institutions $200 million over 18 months and was to be finalized by late this summer or early fall.

According to hospital officials at the time, their combined institution would serve more patients, attract more top-rate doctors and prepare their hospitals for future Medicare reimbursement cuts and other financial uncertainties relating to the Affordable Care Act.

Health industry experts said a combined Henry Ford-Beaumont system also would gain greater leverage in price negotiations with insurers, netting more reimbursement dollars.

But the first public signs of trouble emerged last week. Five Beaumont clinical service chiefs delivered a letter to Beaumont’s Board of Directors, urging it to reconsider the merger idea, according to a report in Crain’s Detroit Business.

Both hospital systems’ boards voted to extend the original May 15 expiration date for the merger’s intent letter. Under the original timetable, that letter was to be followed by a formalized agreement that would name the new organization and its chief executive. Schlichting was considered a lead contender for that job.

The end to the talks brings “clarity” into everyday planning at the new Oakland University William Beaumont School of Medicine, said Dr. Robert Folberg, founding dean of the school and Beaumont’s chief academic officer.

Folberg would not say whether he supported or opposed the merger between Henry Ford, where Wayne State University medical students train, and Beaumont, where Oakland students will train.

“In the initial announcement, it was clear that Ford would continue to support its relationship with Wayne State and that Beaumont would continue its support to OUWB,” he said. “Everyone had that assurance.”

The Oakland-Beaumont medical school began taking in students in the fall of 2011. In practical terms, he said, the two academic institutions would have continued to operate their schools separately.